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Finance
Q:
With respect to private placements of bonds, which of the following is correct?
I. Issuers of privately placed bonds tend to be less well known than public bond issues.
II. Interest rates on privately placed debt tend to be higher than for similar public issues.
III. Purchasers of privately placed debt have assets of at least $100 million.
IV. Once bonds have been privately placed, the original buyers must hold the bonds until maturity.
A. I only
B. I and III only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
Q:
A holder of Rainbow Funds convertible bonds with a $1,000 par and a $1,100 price can convert the bond to 25 shares of common stock. The stock is currently priced at $36 per share. By what percent does the stock price have to rise to make conversion potentially attractive?
A. 10.00%
B. 14.73%
C. 22.22%
D. 23.64%
E. 25.69%
Q:
Convertible bonds are
I. options attached to bonds that give the bondholder the right to purchase stock at a preset price without giving up the bond.
II. bonds in which the issue matures (converts) a little each year.
III. bonds collateralized with certain types of automobiles.
IV. bonds that may be converted to a certain number of shares of stock determined by the conversion ratio.
A. I only
B. I and II only
C. I, II, and III
D. IV only
E. I and III only
Q:
SEC Rule 144 A does which of the following?
A. Allows privately placed investments to be traded on a limited basis
B. Allows bond issuers to call their bonds when desired
C. Determines the limits of responsibility of bond covenants
D. Requires that bonds traded on the NYSE bond market utilize the ABS system
E. None of the above
Q:
Which of the following is/are true about callable bonds?
I. Must always be called at par
II. Will normally be called after interest rates drop
III. Can be called by either the bondholder or the bond issuer
IV. Have higher required returns than noncallable bonds
A. I and II only
B. II and IV only
C. II and III only
D. I, II, and III only
E. I, II, III, and IV are true
Q:
The largest type of municipal bonds outstanding are _______________.
A. revenue bonds
B. industrial development bonds
C. Treasury STRIPS
D. convertible bonds
E. general obligation bonds
Q:
When an investment banker purchases an offering from a bond issuer and then resells it to the public this is known as a
A. rights offering.
B. private placement.
C. firm commitment.
D. best efforts.
E. standby offering.
Q:
Standard revenue bonds are
A. backed by the full taxing authority of the municipality.
B. collateralized by the earnings from a specific project.
C. bonds backed by mortgages.
D. backed by the U.S. Treasury.
E. always offered with a best efforts offering.
Q:
An investor is trying to decide between a muni paying 5.75% or an equivalent taxable corporate paying 8.25%. What is the minimum marginal tax rate the investor must have to consider buying the municipal bond?
A. 80.00%
B. 20.00%
C. 25.00%
D. 66.67%
E. 30.00%
Q:
An investor is in the 28% federal tax bracket, pays a 9% state tax rate and 4% in local income taxes. For this investor a municipal bond paying 6% interest is equivalent to a corporate bond paying _____ interest.
A. 11.79%
B. 10.17%
C. 9.08%
D. 9.68%
E. 8.47%
Q:
Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________.
A. exempt from federal taxes; exempt from all taxes
B. taxable at the state level only; exempt from state taxes only
C. taxable at federal level only; exempt from federal taxes
D. taxable at the state level; taxed at the federal level
E. totally tax exempt; exempt from state taxes
Q:
On September 1, 2012 an investor purchases a $10,000 par T-Bond that matures in 12 years. The coupon rate is 6% and the investor buys the bond 70 days after the last coupon payment (110 days before the next). The ask yield is 7%. The dirty price of the bond is:
A. $9,295.45.
B. $9,300.55.
C. $9,313.75.
D. $9,321.82.
E. $9,333.24.
Q:
On July 1, 2012 you purchase a $10,000 par T-Note that matures in 5 years. The coupon rate is 8% and the price quote is 98:6. The last coupon payment was May 1, 2012 and the next payment is November 1, 2012 (184 days total). The accrued interest is
A. $132.61.
B. $101.00.
C. $50.54.
D. $40.65.
E. $35.67.
Q:
Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus?
A. AAA-rated noncallable corporate bond with a sinking fund
B. AA-rated callable corporate bond with a sinking fund
C. AAA-rated callable corporate bond with a sinking fund
D. High-quality municipal bond
E. AA-rated callable corporate bond without a sinking fund
Q:
The ask yield on a 6% coupon Treasury bond maturing in 8 years is 5.488%. If the face value is $1000, what should be the QUOTED cost of the bond today (use semiannual compounding)?
A. 103:6
B. 103:7
C. 103:8
D. 103:9
E. 103:10
Q:
A life insurer owes $550,000 in 8 years. To fund this outflow the insurer wishes to buy strips that mature in 8 years. The strips have a $5,000 face value per strip and pay a 6% APR with semiannual compounding. How much must the insurer spend now to fully fund the outflow (to the nearest dollar)?
A. $110,000
B. $342,742
C. $355,224
D. $362,355
E. $370,890
Q:
An 18 year T-Bond can be stripped into how many separate securities?
A. 18
B. 19
C. 36
D. 37
E. 38
Q:
A Treasury security in which periodic coupon interest payments can be separated from each other and from the principal payment is called a
A. STRIP.
B. T-Note.
C. T-Bond.
D. G.O. Bond.
E. Revenue Bond.
Q:
The quoted ask yield on a 14 year $1000 par T-Bond with a 7% semiannual payment coupon and a price quote of 98:15 is
A. 7.00%.
B. 7.18%.
C. 7.30%.
D. 3.59%.
E. 3.63%.
Q:
A T-Bond with a $1000 par is quoted at 97:14 Bid, 97:15 Ask. The clean price for you to buy this bond is
A. $974.38.
B. $975.42.
C. $974.69.
D. $975.77.
E. none of the above.
Q:
You buy a principal STRIP maturing in 5 years. The price quote per hundred of par for the strip is 75.75%. Using semiannual compounding what is the promised yield to maturity on the STRIP?
A. 5.632%
B. 5.712%
C. 2.816%
D. 2.945%
E. 4.566%
Q:
Callable bonds have lower required yields than similar convertible bonds, ceteris paribus.
Q:
Eurobonds are bonds denominated in the issuer's home currency, but are issued outside their home country.
Q:
Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.
Q:
Bond ratings use a classification system to give investors an idea of the amount of default rate risk associated with the bond issue.
Q:
With TIPS, the security's coupon rate is changed every six months by the inflation rate as measured by the CPI.
Q:
An unsecured bond that has no specific collateral other than the general creditworthiness of the issuing firm is called a debenture.
Q:
In a Treasury bond quote with a $1000 face value, you find the bid is equal to 100:24 and the ask is equal to 100:26. You could buy this bond for $1008.125.
Q:
Revenue bonds are backed by the full revenue of the municipality.
Q:
Accrued interest owed to the bond seller increases as the next coupon payment date approaches.
Q:
The dirty price plus accrued interest is called the clean price of the security.
Q:
T-notes and T-bonds are issued in minimum denominations of $1,000 or multiples of $1,000.
Q:
"On the run" Treasury notes and bonds are newly issued securities and "off the run" Treasuries are securities that have been previously issued.
Q:
Treasury notes and bonds and municipal bonds are default risk free.
Q:
A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principle is paid by final maturity.
Q:
TIPS are a Treasury offering that protects investors from unexpected increases in inflation.
Q:
In a Treasury auction, preferential bidding status is granted to
A. competitive bidders.
B. noncompetitive bidders.
C. short sale committed bidders.
D. commercial bank bidders.
E. no group of bidders.
Q:
A 50-day maturity money market security has a bond equivalent yield of 3.60%. The security's EAR is
A. 3.69%.
B. 3.61%.
C. 3.55%.
D. 3.87%.
E. 3.66%.
Q:
From 1990 to 2010, which one of the following money market securities actually declined in terms of dollar amount outstanding?
A. Commercial paper
B. Treasury bills
C. Federal funds and repos
D. Negotiable CDs
E. Banker's Acceptances
Q:
A $2 million jumbo CD is paying a quoted 3.55% interest rate on 180-day maturity CDs. How much money will you have at maturity if you invest in the CD?
A. $2,000,000
B. $2,035,014
C. $2,035,500
D. $2,071,000
E. $2,088,400
Q:
Suppose that $10 million face value commercial paper with a 270-day maturity is selling for $9.55 million. What is the BEY on the paper?
A. 4.71%
B. 6.42%
C. 6.37%
D. 6.28%
E. 4.50%
Q:
A 90-day T-Bill is selling for $9,900. The par is $10,000. The effective annual return on the T-Bill is (watch your rounding)
A. 4.00%.
B. 4.16%.
C. 4.10%.
D. 4.04%.
E. 4.21%.
Q:
If a $10,000 par T-Bill has a 3.75% discount quote and a 90-day maturity, what is the price of the T-Bill to the nearest dollar?
A. $9,625
B. $9,906
C. $9,908
D. $9,627
E. None of the above
Q:
A Chinese exporter sells $200,000 of toys to a French importer. The Chinese exporter requires the French importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 90-day note at a 4% discount. What is the exporter's true effective annual financing cost?
A. 4.00%
B. 4.04%
C. 4.10%
D. 4.16%
E. 4.22%
Q:
A U.S. exporter sells $150,000 of furniture to a Latin American importer. The exporter requires the importer to obtain a letter of credit. When the bank accepts the draft the exporter discounts the 120-day note at a 5.25% discount. What is the exporter's true effective annual financing cost?
A. 5.52%
B. 5.42%
C. 5.34%
D. 5.29%
E. 5.25%
Q:
LIBOR is generally _______________ the Fed funds rate because foreign bank deposits are generally ________________ than domestic bank deposits.
A. greater than; less risky
B. less than; more risky
C. the same as; equally risk
D. greater than; more risky
E. less than; less risky
Q:
You buy a $10,000 par Treasury bill at $9,575 and sell it 60 days later for $9,675. What was your EAR?
A. 4.44%
B. 6.29%
C. 6.35%
D. 6.52%
E. 6.67%
Q:
In dollars outstanding in 2010 the largest money market security was
A. commercial paper.
B. banker's acceptances.
C. T-Bills.
D. Fed funds & repos.
Q:
The most liquid of the money market securities are
A. commercial paper.
B. banker's acceptances.
C. T-Bills.
D. Fed funds.
E. repurchase agreements.
Q:
A banker's acceptance is
A. a time draft drawn on the exporter's bank.
B. a method to help importers evaluate the creditworthiness of exporters.
C. a liability of the importer and the importer's bank.
D. an add on instrument.
E. for greater than 1 year maturity.
Q:
A 180 day $3 million CD has a 4.25% annual rate quote. If you buy the CD, how much will you collect in 180 days?
A. $3,047,439
B. $3,045.678
C. $3,062,877
D. $3,063,750
E. $3,127,500
Q:
A negotiable CD
A. is a bank issued transactions deposit.
B. is a registered instrument.
C. is a bank issued time deposit.
D. has denominations ranging from $50,000 to $10 million.
E. pays discount interest.
Q:
Which one of the following statements about commercial paper is NOT true?
Commercial paper issued in the United States
A. is an unsecured short-term promissory note.
B. has a maximum maturity of 270 days.
C. is virtually always rated by at least one ratings agency.
D. has no secondary market.
E. carries an interest rate above the prime rate.
Q:
The rate of return on a repo is
A. determined by the rate of return on the underlying collateral.
B. strongly affected by the current Fed funds rate at the time of the repo.
C. determined at the time of the repo.
D. A and C.
E. B and C.
Q:
The following formula is used to calculate the _____________ of a money market investment. A. EARB. APRC. single-payment yieldD. discount yieldE. BEY
Q:
The discount yield on a T-Bill differs from the T-bill's bond equivalent yield (BEY) because
I. The discount yield is the return per dollar of face value and the BEY is a return per dollar originally invested.
II. A 360-day year is used on the discount yield and the BEY uses 365 days.
III. The discount yield is calculated without compounding, the BEY is calculated with compounding.
A. I only
B. II only
C. I and II only
D. II and III only
E. I, II, and III
Q:
Rates on federal funds and repurchase agreements are stated
A. on a bond equivalent basis with a 360 day year.
B. on a bond equivalent basis with a 365 day year.
C. as a discount yield with a 360 day year.
D. as an EAR.
E. as a discount yield with a 365 day year.
Q:
A dealer is quoting a $10,000 face 180-day T-Bill quoted at 2.75 bid, 2.65 ask. You could buy this bill at ______________ or sell it at _______________.
A. $9,869.23; $9864.36
B. $9864.36; $9,869.23
C. $9,867.50; $9862.50
D. $9,862.50; $9,867.50
E. none of the above
Q:
In the T-Bill auction process, the competitive bidder is guaranteed a ______________ and a noncompetitive bidder is guaranteed a _______________.
A. minimum price; maximum price
B. maximum price; minimum price
C. maximum price; given quantity
D. minimum price; maximum quantity
E. none of the above
Q:
A time draft payable to a seller of goods, with payment guaranteed by a bank is a
A. commercial paper security.
B. T-Bill.
C. repurchase agreement.
D. negotiable CD.
E. banker's acceptance.
Q:
A short-term unsecured promissory note issued by a company is
A. commercial paper.
B. T-Bills.
C. repurchase agreement.
D. negotiable CD.
E. banker's acceptance.
Q:
A repo is in essence a collateralized
A. banker's acceptance.
B. certificate of deposit.
C. Fed funds loan.
D. commercial paper loan.
E. Eurodollar deposit.
Q:
Money market securities exhibit which of the following?
I. Large denomination
II. Maturity greater than one year
III. Low default risk
IV. Contractually determined cash flows
A. I, II, and III
B. I, III, and IV
C. II, III, and IV
D. II and IV
E. I, II, III, and IV
Q:
For the purposes for which they are used, money market securities should have which of the following characteristics?
I. Low trading costs
II. Little price risk
III. High rate of return
IV. Life greater than one year
A. I and III
B. II and IV
C. III and IV
D. I and II
E. I, II, and III
Q:
The bond equivalent yield times 365/360 is equal to the single payment yield.
Q:
360/h times the difference between the face value and the current value divided by the face value gives you the discount yield on an instrument.
Q:
Fed funds are short-term unsecured loans while repos are short-term secured loans.
Q:
The largest secondary money market in the United States is the secondary market for T-Bills.
Q:
In the T-Bill secondary market the ask yield will normally be less than the bid yield.
Q:
The U.S. Treasury switched from a discriminating price auction to a single price auction because the latter lowered the average price paid by investors.
Q:
Euro commercial paper is a short-term obligation of the European Central Bank.
Q:
Commercial paper, Treasury bills, and banker's acceptance rates are all quoted as discount yields.
Q:
Commercial paper is a short term obligation of the U.S. government issued to cover government budget deficits and to refinance maturing government debt.
Q:
The majority of money market securities are low denomination, low risk investments designed to appeal to individual investors with excess cash.
Q:
Money markets exist to help reduce the opportunity cost of holding cash balances.
Q:
Everything else equal, an effective annual rate will be greater than the bond equivalent yield on the same security.
Q:
You are a corporate treasurer for Esso Oil. The quoted rate on dollar denominated euro commercial paper has just blipped down recently. Your firm can issue $10 million of 180-day euro commercial paper in the London markets at 3.45%. You can also invest the proceeds in the United States in comparable maturity negotiable dollar-denominated CDs, which are quoting 3.95%. Ignoring any transactions costs, how much money, if any, can Esso make by borrowing in the euro markets and investing in the United States? Is this a good deal or not? Should you expect it to last? Explain.
Q:
One-hundred-eighty-day commercial paper can be bought at a 3.75% discount. What are the bond equivalent yield and the effective annual rate on the commercial paper? Why do these rates differ?
Q:
Who are the major participants in money markets?
Q:
How does a banker's acceptance help create more international trade?